Finance and Capital Structure

Question 1

What to pay attention to with yield?

Answer 1

TIME APPORTION non-annual yield back up

Question 2

Dividend yield is payout over what?

Answer 2

Market value

Not book value

Question 3

What risks does WACC consider?

Answer 3

At te start of the wacky races the drivers sees the risks and says ‘fuck’s sake’ in his stupid car

1. Financial risk (of company)
2. Systematic risk (of project)

Question 4

Implications of increase in WACC

Answer 4

1. More cost, so less company value
2. But, potentially more value if +ve NPV project

Question 5

What should you use if you can’t use WACC?

Answer 5

APV

Which uses the UNGEARED BETA

Question 6

How to calculate TERP

Answer 6

( MV atm + issue proceeds + PROJECT NPV ) / No shares AFTER issue

Price after issue (ex-rights price!)

Value = TERP - Price (to buy)
Wealth impact = Wealth before & after

Question 7

ARR =

Answer 7

Accounting profit / Non-current SHAREHOLDERS’ FUNDS

Shareholders’ funds are Equity AND Retained earnings (less earnings retained in the year)

Question 8

When will WACC not be appropriate?

Answer 8

1. Different risk: So different beta so different WACC
2. Specific financing i.e. not using source-weighted capital

Question 9

So as to get it done nice and quickly, what things should you seek out when calculating a TERP?

Answer 9

1. **Number **of shares
2. Price of shares

(a. Before, b. during and c. after)

Question 10

In a rights issue, what is the rights price?

Answer 10

The ACTUAL PRICE of the new shares issued

Question 11

Will the actual share price after a rights issue end up being the TERP?

Answer 11

Not necessarily. It won’t when, e.g.:

1. All rights not taken up
2. The proceeds aren’t invested in +ve NPV projects
3. There was already a +VE NPV project included in the TERP

Question 12

With debt, what not to mix up?

Answer 12

YIELD and COST

Yield is RATE(…)
Cost is (1-T) x Yield

Question 13

How to work out (required) issue price (of a redeemable debenture)?

Answer 13

MARKET VALUE (at issue)
Because what you issue it for, assuming people pay for it then, MUST BE the market value at that time

I.e. PRESENT VALUE

I.e. PV(…) formula

Question 14

How can you calculate the market value of e.g. debt when you need a particular rate of return

Answer 14

PRESENT VALUE ( =PV(…) )

Question 15

If you are told that some new debt has to have the same rate of return as some other debt, what is that the same as saying?

Answer 15

The ROR of the new debt = the YIELD of the old debt (and vice versa)

I.e. Debt YIELD = RATE OF RETURN

Question 16

What to remember about ther WACC for an existing company considering a new investment?

Answer 16

1. Kd / Ke of the NEW INVESTMENT ONLY (as expected, when appraising the effect of the cost of the capital required for that actual investment)
2. MVs of EXISTING COMPANY (Not as you would logically expect, *because assuming the additional capital is negligible, so would be unnecessary effort)

Question 17

What may diversification change?

Answer 17

Systematic business risk

I.e.

Beta

Question 18

How do you find the systematic risk of a new market?

Answer 18

Take the beta of the new market

Question 19

How do you eliminate financial risk?

Answer 19

Degear

Because financial risk = risk from financing i.e. capital structure i.e. debt & equity

Question 20

What will increased systematic business risk do to cost of capital?

Answer 20

‘Higher cost of debt because of the higher systematic business risk’

Question 21

What is the overriding objective of a company?

Answer 21

To generate long term wealth for the shareholders

However, this can only be done by predicting behavior of other main stakeholders

Question 22

Main stakeholders in a business

Answer 22

A group of stakeholders wearing suits and holding their steaks is attacked by a giant radioactive spider, luckily one of them rips off their suit to show he is Super Man, and Super Man enjoys lifting giant radioactive spiders

1. Shareholders
2. Managers (own objectives (pay/security/power so agency problems)
3. Employees (& unions) (Morale & Job security)
4. Lenders (& Creditors)
5. Government (Laws AND tax)
6. Regulators
7. Society (E.g. environment)

Question 23

ESG

Answer 23

Non-financial factors that are also important
Even for 100% profit-focus, affecting invest R&R

Environmental: Frog’s resounding croak
Fines, Reputation, Claims (Legal)

Social: Hippogriffs rarely play badminton during daytime
H&S, Rights (workers’), Pay, Benefits, Diversity (& equal opps)

Governance: S&M
Structure (of board) and Monitoring (of directors)
Bad governance leads to DTF: Decisions (bad ones), Taking risk, Fraud